. Understanding how shirking decreases team output Caroline sells bottled water from a small stand by the beach. On the last day of summer vacation, many people are on the beach, and Caroline realizes that she can make a lot more money this day if she hires someone to walk up and down the beach selling water. She finds a college student named Antonio and makes him the following offer: They'll each sell water all day and split their earnings (revenue minus the cost of water) equally at the end of the day. Caroline knows that if they both work hard, Antonio will earn $90 on the beach and Caroline will earn $180 at her stand, so they will each take home half of their total revenue: . If Antonio shirks, he'll generate only $50 in earnings. Caroline does not know that Antonio estimates his personal cost (or disutility) of working hard as opposed to shirking at $25.

Once out of Caroline's sight, Antonio faces a dilemma: work hard (put in full effort) or shirk (put in low effort).

In terms of Antonio's total utility, it is better for him to (shirk or work hard?)

Taking into account the loss in utility that working hard brings to Antonio, Caroline and Antonio together (are/ are not) ff if Antonio works hard instead of shirking.

Caroline knows Antonio will shirk if unsupervised. She considers hiring her good friend Carrie, who happens to be free on that day, to keep an eye on Antonio. The most Caroline should be willing to pay Carrie to supervise Antonio, assuming supervision is sufficient to encourage Antonio to work hard, is (25, 20, 45, 15)

Caroline knows Antonio will shirk if unsupervised, but she could not find a reliable person to watch him. Which of the following arrangements will ensure that Antonio works hard without making Caroline any worse off than she is when Antonio shirks?

Allow Antonio to keep 73% of the revenue from the bottles of water he sells instead of 50%

Make Antonio promise to work hard Pay Antonio $70, regardless of how many bottles of water he sells

Allow Antonio to keep 70% of the revenue from the bottles of water he sells instead of 50%

b) Taking into account the loss in utility that working hard brings to Antonio, Caroline and Antonio together are not better off Antonio shirks instead of working hard.

Increase in combined income from shirking = $60

Increase in combined income from working = $110 - $30 = 80

c) Caroline will be willing to pay carry at most $25 yo Carrie.

Increase in Caroline's income from working vs shirking =( $110 - $60)/2 = $25

d) Allow Antonio to keep 75% of the revenue from the bottles of water he sells instead of 50%

Explanation:

Antonio

Increase in income from shirking = $60 x .75 = $45

Increase in income from working =( $110 x .75) - $30 = $52.5

Hence, Antonio would have incentive to work hard.